From: AlanBaggett@volcanomail.com   
      
   Income splitting targeted by federal government : CRA SOTW   
      
   By Ray Turchansky, Edmonton Journal September 5, 2013   
      
      
   EDMONTON - Spousal and family trust loans, two seldom used methods of income   
   splitting that reduce taxes, are about to become less of a bargain.   
      
   The Canada Revenue Agency is raising the prescribed interest rate of these   
   loans from a historic low of 1.0 per cent to 2.0 per cent on Oct. 1.   
      
   Income splitting is an effective way to reduce overall taxes involving   
   spouses, eligible common-law partners, same-sex partners and children, by   
   moving income from a taxpayer in a higher marginal tax bracket to one in a   
   lower marginal bracket. There can    
   be other advantages, especially for seniors, increasing their pension income   
   tax credits, while also reducing clawbacks of Old Age Security benefits and   
   the age amount tax credit for people 65 and older.   
      
   And there are some occasions when moving money to the higher-income person   
   allows the lower-income person to claim more medical expense tax credits. Or,   
   when a high-income earner already has all benefits clawed back, receiving   
   money from a lower-income    
   spouse allows the latter to reduce clawbacks.   
      
   In the 1990s, a popular strategy had parents giving investments to their   
   children so the returns would be taxed at the child’s lower tax bracket. But   
   CRA came up with attribution rules, including one involving children aged 14   
   and younger, requiring some    
   of the youngster’s investment income be attributed to the parent, who pays a   
   so-called “kiddie tax.”   
      
   Many legal methods of splitting income remain. Couples can split Canada   
   Pension Plan benefits if they are eligible and apply, in which case split   
   amounts are received by cheque. Pension income splitting that started in 2007   
   is done through the tax return,   
    and allows the splitting of company pension, life annuities, payments from a   
   registered retirement income fund, and annuity payments from a registered   
   retirement savings plan. You can also use spousal RRSPs to split income,   
   although under attribution    
   rules, money withdrawn from a spousal RRSP within three years of the last   
   contribution is taxed in the hands of the contributor.   
      
   A business owner can pay “reasonable” salaries to a spouse or children for   
   work actually done, or give them shares in their company paying dividends,   
   which are taxed less due to the dividend tax credit. Or, the higher-income   
   spouse can simply pay all    
   household expenses and let the lower-income spouse do the investing, so the   
   capital gains, dividends and interest will be taxed in a lower bracket. And   
   one spouse can give $5,500 a year to the other, or to a child aged 19 or   
   older, to invest in a Tax-   
   Free Savings Account.   
      
   Another way to reduce taxation on investment income is through the previously   
   mentioned spousal loan or for children through a family trust, to invest in   
   stocks, bonds or mutual funds. CRA requires spousal and family trust loans be   
   in writing, outlining    
   terms of repayment and an interest rate at least as much as the prescribed CRA   
   rate at the time of the agreement, the rate being good for the length of the   
   loan. The current rate has been 1.0 per cent since April 2009, but the   
   increase to 2.0 per cent    
   this October could begin a return to the 5.0 per cent rate seen at the end of   
   2007.   
      
   The loan should be made by cheque so there is a paper trail. The loan   
   principal doesn’t have to be paid back, but annual interest must be paid by   
   one spouse to the other by Jan. 30 of the following year, and should also be   
   made by cheque. If interest isn’   
   t paid, under attribution rules, investment returns are taxed in the hands of   
   the spouse giving the loan.   
      
   The higher-income spouse making the loan receives and pays tax on the interest   
   received. The lower-income spouse gets a tax deduction for interest paid on a   
   loan producing investment income from stocks, bonds or mutual funds, and pays   
   taxes on returns at    
   a lower rate.   
      
   Adrian Mastracci, portfolio manager with KCM Wealth Management Inc. in   
   Vancouver, gives the example of a higher-income spouse lending $100,000 to a   
   lower-income spouse at 1.0 per cent. The higher-income spouse is taxed on   
   $1,000 interest received. The    
   lower income spouse invests the money and makes a $4,000 return, then is taxed   
   on the $4,000 return minus $1,000 interest paid. That means net income of   
   $3,000 is moved from the higher-taxed person to the lower-taxed person each   
   year during the length of    
   the loan.   
      
   The annual saving could be $720 a year in Alberta. And savings increase as   
   loan interest rates are lower and investment returns are higher.   
      
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